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SHOWN: Peter Thiel, one of the founding partners of The Founders Fund, in his office with a cool Lord of the Rings sculpture. These photos were made on Monday, Dec. 11, 2006, in San Francisco, CA.
(Katy Raddatz/SF Chronicle)
* Peter Thiel Mandatory credit for the photographer and the San Francisco Chronicle. ; mags out.

Behind the Internet's roaring comeback is a new generation of investors experimenting with the way Silicon Valley startups get founded and funded.

Chief among them is Peter Thiel, a 39-year-old maverick money manager who in the past four years has turned his $60 million payout from the sale of the PayPal online payment service he co-founded into a growing financial fiefdom. He runs Clarium Capital Management LLC, one of the nation's most successful and daring hedge funds with $2.1 billion in assets, and The Founders Fund, a tiny but increasingly influential venture capital firm with a laser-beam focus on consumer Internet startups.

Thiel garners attention not just for his business acumen and luxurious lifestyle, but for his unorthodox belief that founders should get more of a stake and a say in their companies. Hence the name he gave his venture capital firm and its unusual location, far from San Francisco's Financial District or Silicon Valley's Sand Hill Road, in spacious high-tech headquarters in the Presidio complex that houses George Lucas' movie empire.

"We are basically trying to help the next generation of founders and entrepreneurs build awesome businesses," said Thiel, a former corporate lawyer known as a quiet but determined competitor in the boardroom and on the chessboard. "We tend to like somewhat riskier, more out-of-the-box companies that really have the potential to change the world."

Thiel launched The Founders Fund in early 2005 and recruited former PayPal colleagues Ken Howery and Luke Nosek, both 31. They shared his desire to create a venture firm run by former entrepreneurs for entrepreneurs. Now Thiel has recruited Sean Parker, one of Silicon Valley's more colorful personalities and a fellow startup philosopher, to join his quartet of venture capitalists on the prowl for the next big investment.

Parker, 27, an early veteran of three high-profile startups -- Napster Inc., Plaxo Inc., and Facebook Inc. -- convinced The Founders Fund to invest in Facebook, one of Silicon Valley's most promising social networking Web sites. Parker's uncanny intuition for what people, products and markets are likely to take off and his singular drive to empower entrepreneurs make him a significant asset for Founders Fund, Thiel said.

A new approach

Thiel is re-examining and might even be reinventing traditional venture capital. Paul Saffo, a tech industry forecaster who has tracked Silicon Valley for the past two decades, said long-standing investors, who once reigned supreme from their Sand Hill Road pedestals, are now getting squeezed by private equity firms on the high end, and wealthy angel investors on the low end of the investing scale. A bleak market for venture-backed initial public offerings has only increased the pressure.

"We will see more changes to the venture-capital model in the next five years than we have seen in the last 25," Saffo said. "Peter is definitely tweaking the model. He has the luxury and flexibility to play around a bit."

Entrepreneurs trying their hand at the venture capital game is nothing new, and it can be a winning combination for some. "You certainly pick up a lot of credibility as a venture capitalist if you have been an entrepreneur," said Mark Heesen, president of the National Venture Capital Association.

So far, the combination is working for The Founders Fund, which raised its first $50 million fund in 2005 and has invested in a dozen companies. Now it is on the verge of raising a second fund in the $120 million to $150 million ballpark. While the first fund focused on raising money from like-minded entrepreneurs and investors, this time Thiel is casting a wider net to lure more institutional investors such as universities and endowments, the bread-and-butter of traditional venture firms.

The little guy

Dollar for dollar, The Founders Fund is still a bit player in a soaking-rich field. But its close ties to gifted entrepreneurs and its founder-friendly approach have swung open doors with sought-after Silicon Valley startups.

That's where Thiel believes Parker will give The Founders Fund another edge. Few better understand the challenges and pitfalls entrepreneurs face in the risky and sometimes ruthless world of Silicon Valley. Parker had a dramatic falling out with high-profile investors Mike Moritz of Sequoia Capital, a marquee venture capital firm, and Ram Shriram, a Google Inc. angel investor that led to Parker's abrupt departure from the Internet address book company Plaxo.

Parker says he was drawn to the opportunity to give entrepreneurs more control over their destiny.

"We are all about creating an alignment between investors and entrepreneurs," Parker said.

Entrepreneurs frequently complain about the imbalance of power with venture capitalists, yet, until now, there wasn't much entrepreneurs could do about it. Without venture dollars, they had little hope of transforming their lofty ideas into viable businesses. But the technology boom of the 1990s netted big returns for many entrepreneurs in Silicon Valley who are now turning around and investing their new wealth in budding ventures.

One entrepreneur won over by the Founders Fund's philosophy is Barney Pell, the 38-year-old founder of Powerset, a natural-language search-engine startup that harbors ambitions of challenging Google. By analyzing the underlying meaning of search queries, Powerset hopes to produce more relevant results.

Pell gained early support for this intriguing yet unproven idea from Thiel, a longtime friend and Stanford University classmate. When Pell was raising a $2 million round of angel funding, The Founders Fund quickly invested $800,000. Founders Fund then pumped more money into a $10.5 million venture round in October.

"From the first board meeting, it was clear that Peter was putting all of his energy into thinking about how to help this company as much as possible," Pell said.

Benefit to founders

Powerset also was the first company to sign up for a Parker brainstorm. Inspired by his personal frustrations as a startup founder, Parker came up with a novel arrangement that he hopes will benefit other founders as they build their companies: a new type of stock that allows founders to cash out a small percentage of their stake in a funding round so they don't have to wait until the company is sold or goes public.

Pell, who maxed out credit cards, deferred salary and considered taking out a second mortgage until he could raise serious money and interest from the right investors, says he's relieved that he and his fellow founders don't have to feel rushed to sell the company to get some return on their investment of energy, time and money.

"There is often a tension between venture capitalists and founders. The venture capitalist wants the founders to starve and to have no cash liquidity until the very end. Of course, the founders, unlike the venture capitalists, are putting all of their eggs in one basket," Pell said. "Sean came up with the idea of allowing founders to sell small amounts of their shares along the way so you can have some life-changing effects and reduce your risk and everyone can be aligned for a home run."

Lesson learned

Parker says he learned a powerful lesson about the importance of taking time to build a business from observing the trajectories of some of the valley's most successful businesses. What would have happened if the founders had sold those companies before fine-tuning them? PayPal started out as an encryption product that beamed money between mobile devices before hitting on the online payment business that it ultimately sold to eBay for $1.5 billion. Google didn't strike Internet ore until the paid search market had time to fully develop.

"Largely because we were all founders ourselves, we're inherently more interested in helping new entrepreneurs develop into successful leaders than we are in getting rich," Parker said. "As someone who has started and run a few companies myself, my primary interest is in helping creative people build companies and run those companies over the long-term. I also happen to believe that this is the best way to create value for my limited partners, and by extension, for myself."